Benjamin Graham, the father of value investing, suggested using certain financial strength criteria when picking stocks. In order to increase the likelihood of discovering quality companies, the search should be narrowed to include stocks that have the following characteristics:
- A current ratio of more than 2.
- A working capital that exceeds the long-term debt.
The current ratio indicates whether the balance sheet provides the company with sufficient margins to refund all of its short-term creditors. The current ratio is the result of total current assets divided by total current liabilities.
A working capital that exceeds long-term debt indicates the balance sheet lies on solid financial pillars, so that the company can keep running its activities without interruption and fulfill all its financial duties toward capital lenders.
Below are some results of my search. Further, analysts on Wall Street recommend a rating of hold to overweight for the following securities, sustaining expectations for higher market valuations.
ASML Holding
The first company I found that met these criteria was ASML Holding N.V. (ASML, Financial). Based in The Netherlands, the company is the designer, manufacturer and marketer of advanced semiconductor equipment systems.
ASML has a current ratio of 2.72, which is better than the industry median of 2.26. The current ratio is ranked higher than 59.7% of a total of 814 competitors operating in the semiconductors industry.
The GuruFocus chart below shows that the trailing 12-month working capital was $7.67 billion and the trailing 12-month long-term debt was $3.44 billion as of Dec. 12, 2018.
GuruFocus assigned a very positive rating of 7 out of 10 for the company’s financial strength and a very high rating of 9 out of 10 for its profitability.
Shares of ASML closed at $289.89 on Friday for a market capitalization of $122.08 billion. The stock has a price-book ratio of 9.08 versus the industry median of 1.74 and a price-sales ratio of 10.05 versus the industry median of 1.69.
Wall Street issued an overweight recommendation rating for the stock.
STMicroelectronics
The second company that met the criteria was STMicroelectronics N.V. (STM, Financial). The company is a Swiss multinational producer of semiconductors.
The stock has a current ratio of 2.87, which is better than the industry median of 2.26. The current ratio of STMicroelectronics is ranked higher than 62.5% of a total of 814 competitors operating in the semiconductors industry.
STMicroelectronics has a trailing 12-month working capital of $3.73 billion and a long-term debt of $1.76 billion as of Dec. 28, 2018.
GuruFocus assigned a very positive rating of 7 out of 10 for the company’s financial strength and a moderate rating of 5 out of 10 for its profitability.
Shares of STMicroelectronics closed at $27.34 on Friday for a market capitalization of $24.33 billion. The stock has a price-book ratio of 3.68 versus the industry median of 1.74 and a price-sales ratio of 2.64 versus the industry median of 1.69.
Wall Street issued an overweight recommendation rating for shares of STMicroelectronics.
Lindsay
The third company that met the criteria was Lindsay Corp. (LNN, Financial).
Based in Omaha, Nebraska, the company is a water management and road infrastructure products and services provider.
Lindsay has a current ratio of 3.82, which is much better than the industry median of 1.65. Lindsay tops 90% of a total of 180 competitors operating in the farm and heavy construction Mmchinery industry in terms of a better current ratio.
Lindsay’s trailing 12-month working capital was $231.4 million and its trailing 12-month long-term debt was $115.85 million as of the final quarter of 2018.
GuruFocus assigned a positive rating of 6 out of 10 for the company's financial strength and a rating of 7 out of 10 for its profitability.
Shares of Lindsay closed at $93.55 on Friday for a market capitalization of $1.01 billion. The stock has a price-book ratio of 3.76 versus the industry median of 1.35 and a price-sales ratio of 2.28 versus the industry median of 0.67.
Wall Street issued a hold recommendation rating for shares of Lindsay.
Disclosure: I have no positions in any securities mentioned.
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